A small business faces multiple constraints for some time after it starts its operations. At least, it faces these constraints for some years before it gets out of the red, depending on several factors. Almost every constraint originates from the paucity of cash. Issues with cash supply can jeopardize your business plans. Small business loans can solve this problem in the short term as they enable you to fulfill your immediate cash needs. Such loans can be helpful if you manage them well. Conversely, it can usher in more problems if not handled well.
What is a Small Business Loan?
It is a relatively smaller amount of money provided to either start a small business or to fund the operations of an existing small business. Sometimes, a small business loan is just a euphemism for a personal loan.
Financial institutions, small or big, provide such loans. However, to avail of such a loan, you usually need to first pledge a collateral. A financial institution may deny you the loan in the absence of collateral. So, you may have a great business plan but that does not guarantee you a loan. A sound financial status does. However, you can still get a loan provided you know where to look for it.
How to Get a Small Business Loan?
Getting a small business loan is mainly about fulfilling the expectations of your lender. Obviously, the lender will have in mind such things as your repayment capacity, collaterals, and credit score. So, before applying for a small business loan, it really makes sense to go prepared with the following documents, should your lender need them.
- Collateral details, if any: Collateral, if you do not know about it, is one or more tangible assets that you can pledge to the bank when you are applying for a loan. Collateral can be a house, land, car or anything that returns substantial monetary value. If you fail to repay the loan, the bank can recover the unrecovered amount from the sale of the collateral. Obviously, it helps to have collateral if you plan to apply for small business loan.
- Amount of money you are putting into the business, if any: This is important because this shows the lender that you are serious about the business.
- Your expertise in the chosen niche: Any documented evidence of proficiency (certificates, medals, experience) in your chosen business niche acts as an assurance that you are more likely to earn profits. The lender feels assured that you know what you are doing.
- Statement of personal assets: This may include the assets and liabilities. This may help the lender calculate the amount you are eligible for.
- Tax returns: This is applicable if you already have an established business and have filed for tax returns.
- A credit rating report: This is an extremely important document that your lender might ask for. The lender wants to be sure about your past repayment record, if any. So, a positive credit rating may be important in securing the loan you want.
Typical Sources of Funds
The sections below gives you an idea of how to get funds to either get your small business started or just keep it afloat.
- Your own money: It is one of the most popular sources of funding. You may not have enough cash to fund your business. Still, many business owners have managed to find funds by mortgaging their assets to the lender. You may also find funds by just selling your assets.
- Family and friends: You can ask your family or friends to lend some money. They may be willing to lend or even gift some money to you.
- Line of credit: This is essential, no matter from where you have got your initial funding for the business. A line of credit makes sure that the flow of cash never runs dry. While you may have had a solid business plan with all expenses covered, there may still be situations when your expenses may shot up. Unforeseen expenses may really press your finances hard. In such situations, it is essential to have a line of credit from banks or other financial institutions. For that, you first need to have a solid credit rating so that the banks can rely on your repayment capacity on time.
- Government grant programs: These are probably your best bet for finding funds mainly because of the relatively easier terms and conditions. Usually, you are allowed to borrow for a longer period than that in the case of private lenders. The interest rates may also be lower depending on the type of business you choose and your credit rating. However, you also need to note that government-backed funds are difficult to find. So, you need to work hard.
Tips to get the Best out of the Loan
- It is extremely important to negotiate and have favorable terms and conditions from your lender. When you have favorable terms and conditions, it becomes much easier to repay the loan. So, you do not have to settle for the first offer you get from a financial institution. Check out as many financial institutions as you can and compare the offers. However, for that, you need to first have a solid business plan and a credible credit rating.
- Repay installments on time. When you do that, your credit rating goes up and the financial lender agrees to open a line of credit for you. A line of credit can keep your business running even in the most adverse of conditions.
- Try to break even as early as you can. This can be done by streamlining your budget, keeping a check on unnecessary costs and keeping an eye constantly on the quality of your products and services. When the bottom line of your business improves, you arrive in a position to repay the debt as quickly as possible. And when you do that, you open up possibilities of future credit on easy terms, if needed.
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